Remote Worker Taxation: Navigating Nexus Rules in 2026
5/11/2026
The tax consequences of remote work have settled into a stable but uncomfortable shape. The pandemic-era relief provisions that temporarily suspended nexus consequences are gone. What remains is the pre-existing law applied to a workforce distribution nobody designed for — and the pre-existing law is generally that an employee working in a state creates obligations in that state.
For payroll, this means the department has become the first line of detection for a company-wide tax exposure. When an employee relocates, payroll usually finds out first, and what payroll does in that moment determines whether the company registers voluntarily or gets found.
Two Kinds of Nexus, One Trigger
The word "nexus" gets used for two different things, and conflating them causes companies to worry about the wrong one.
Payroll tax nexus is nearly automatic. An employee performing work in a state generally creates income tax withholding and unemployment insurance obligations there from the first day. There is rarely a threshold, a grace period, or a materiality test. This is the certain consequence.
Business tax nexus is broader and more consequential — corporate income tax, franchise tax, gross receipts tax, and sales tax collection obligations. Here the analysis is more nuanced, but one fact matters enormously: a remote employee working in a state is frequently sufficient to create business tax nexus on its own, because an in-state employee is physical presence.
The exposure asymmetry is what surprises executives. Payroll registration in a new state is an administrative nuisance. A corporate income tax filing obligation in that state — with apportionment consequences and potentially years of unfiled returns — is a materially larger problem, and it was triggered by the same event.
This is why the payroll department's location-change control is a company-level risk control, not a departmental one. Our Multi-State Taxation training covers the payroll side, and the business tax question should be routed to tax or external advisors as soon as payroll detects the move.
What the End of Temporary Relief Changed
During 2020 and 2021, many states issued temporary guidance stating that an employee working remotely due to a government order would not create nexus, and that withholding could continue as though the employee were at their pre-pandemic location.
All of that relief has expired. Two practical consequences persist:
Some companies never unwound the temporary treatment. Payroll systems configured in 2020 to keep withholding for the office state have, in some cases, simply kept doing it. Those companies have been withholding for the wrong state and failing to register in the right one for years, with penalties and interest compounding the whole time.
Employees still believe the relief exists. Expect pushback when you correct withholding, because the employee remembers a rule that no longer applies.
If you have not audited your remote population against actual work locations since the relief expired, that is the single highest-value review available to you. Our How To Handle Payroll Audits & Penalties page covers the self-audit approach.
Convenience of the Employer
A small number of states apply a convenience of the employer rule, and it produces the most counterintuitive result in this area.
Under such a rule, if an employee works remotely for their own convenience rather than because the employer requires it, the state treats the wages as sourced to the employer's location — meaning the employer's state taxes income earned by someone who never set foot there during the period.
The consequences:
- The employee may face taxation by both their residence state and the employer's state
- The resident-state credit may not fully relieve the overlap, because the credit mechanism assumes the other state had a legitimate source claim
- Whether the arrangement was for the employer's necessity or the employee's convenience becomes a documented fact question — and the documentation is created by the employer
That last point is the actionable one. If a remote arrangement is genuinely required by the business — the role is designated remote, there is no assigned office space, the position was posted as remote — say so in writing at the time. Retroactive characterization is far less persuasive than a contemporaneous record.
The De Minimis Problem
Most employers assume there is a safe threshold for incidental work in another state. Sometimes there is, and it varies widely.
- Some states impose no threshold at all, so a single day of work creates a withholding obligation
- Others use a day count before withholding is required
- Others use a wage threshold
- Some apply different thresholds to withholding versus the employee's own filing obligation
There is no uniform federal rule harmonizing this, despite recurring legislative proposals. The practical consequence is that a traveling salesperson, a technician covering a multi-state territory, or an executive attending quarterly meetings in another state can create obligations that nobody tracks.
Realistic controls:
- Require work-location reporting on timesheets for any role that routinely crosses state lines
- Set a written internal policy with a review threshold — not because the policy binds the states, but because it creates a consistent trigger for analysis
- Reconcile travel and expense reports against reported work locations periodically; a hotel folio is evidence of work performed in that state
- Maintain a list of the states your traveling employees actually enter, and check each one's threshold once rather than repeatedly
Unemployment Insurance Does Not Follow the Same Rule
Remote work makes it tempting to assume unemployment insurance follows income tax withholding. It does not. Unemployment wages are reported to one state per employee, determined by a four-part test applied in order: localization of service, then base of operations, then place of direction and control, then employee residence.
For a fully remote employee working entirely from home, localization usually resolves to the employee's home state. For an employee splitting time, the analysis can land somewhere other than where you withhold income tax.
Getting this wrong has a multiplier: unpaid contributions in the correct state carry penalties and interest, and the error jeopardizes the federal FUTA credit, since the 5.4% credit reducing a 6.0% rate to 0.6% is conditioned on timely payment to the correct state. See our Form 940 and Federal-State Unemployment Overview session.
Everything Else That Localizes
Remote employees do not import their previous state's employment rules. They acquire their actual work state's rules — all of them:
- Minimum wage, including any local ordinance rate, which can exceed both the federal and state figures
- Overtime, including daily overtime requirements in states that impose them rather than the federal weekly-only standard
- Exempt salary threshold, where the state sets a level above the federal one — a remote employee can become non-exempt purely by moving
- Paid sick leave accrual and carryover
- Paid family and medical leave contributions, which are frequently employee-funded and require a deduction the employee has never seen before
- Pay statement content, which is state-specific and separately enforceable
- Final paycheck deadlines, which can be same-day and which constrain payment method
- Garnishment limits, where the more protective of state and federal applies
- Workers' compensation coverage, which does not automatically extend across state lines
The exempt threshold item deserves emphasis because it is so easily missed. An employee who was properly exempt in one state can fail the salary test on relocation, converting them to non-exempt and creating overtime liability from the date of the move.
Our Payroll Wage & Hour Training & Certification Program covers the wage and hour side, and final paycheck requirements covers termination timing by state.
Remote Work Across International Borders
An employee working from another country is a categorically different problem, and the instinct to treat it as a slightly harder version of a state move is dangerous.
The issues include foreign income tax withholding and local payroll registration, social security coordination governed by totalization agreements, permanent establishment risk creating a corporate tax presence in that country, local labor law that may attach mandatory protections regardless of the employment contract, and immigration status permitting work.
None of this is resolvable inside the payroll department. The correct response to "I'm working from abroad for a few months" is escalation, before the first payroll in that arrangement. See our inpat and expat payroll rules page and the Payroll Rules For Inpat & Expat Payroll session.
The Controls That Actually Work
A location field that is not the mailing address. Payroll needs to know where work is performed. Using the mailing address as a proxy fails for anyone with a second residence, a recent move, or a long-term travel pattern.
A location-change trigger. Any change crossing a state line generates a compliance task with an owner. This is the single control that prevents the majority of failures.
An annual attestation. Ask every remote employee to confirm their primary work location once a year, in writing. It is cheap, it surfaces undisclosed moves, and it creates a record of reasonable diligence.
A written remote work policy. Require advance approval for a change in work location, state that unapproved relocation may have tax consequences, and reserve the right to decline states where the company will not register. Employers are permitted to limit where they employ people.
A designated escalation path. Payroll detects; tax decides. Make sure the handoff exists and is used, because payroll registration is only the visible part of the exposure.
Frequently Asked Questions
Does a remote employee create tax nexus in their state?
For payroll purposes, almost always — an employee performing work in a state generally creates income tax withholding and unemployment insurance obligations there from the first day, with no threshold or grace period. For business tax purposes, an in-state employee frequently constitutes physical presence sufficient to create corporate income tax, franchise tax, or sales tax obligations as well, which is usually the larger exposure.
Do the pandemic-era remote work tax relief rules still apply?
No. The temporary state guidance that suspended nexus consequences and permitted continued withholding for the pre-pandemic office location has expired. Employers who never unwound that configuration have been withholding for the wrong state and failing to register in the correct one, accruing penalties and interest. Employees frequently still believe the relief exists, so expect questions when withholding is corrected.
What is the convenience of the employer rule?
A rule applied by a small number of states under which wages are sourced to the employer's location if the employee works remotely for their own convenience rather than out of business necessity. It can result in the employer's state taxing income earned by someone who never worked there during the period. Whether the arrangement is employer necessity or employee convenience is a documented fact question, so record the business reason for a remote designation contemporaneously.
How many days can an employee work in another state before withholding is required?
It depends entirely on the state. Some impose no threshold, meaning a single day of work triggers a withholding obligation. Others use a day count or a wage threshold, and some apply different thresholds to employer withholding than to the employee's own filing duty. There is no uniform federal rule, so the thresholds must be checked for each state your employees actually enter.
Can an employer refuse to let an employee work from another state?
Generally yes. Employers may limit the jurisdictions in which they employ people, and a written remote work policy requiring advance approval for a change of work location is both common and defensible. The alternative — discovering the move after the fact — means registering retroactively in a state you did not choose, with penalties running from the first paycheck.
What happens if an employee works remotely from another country?
It becomes a materially different problem involving foreign withholding and payroll registration, social security coordination under totalization agreements, permanent establishment risk creating corporate tax presence, local labor law protections that may override the employment contract, and work authorization. None of it is resolvable within payroll. Escalate before running the first payroll under that arrangement.
Going Deeper
Nexus rules, de minimis thresholds, and paid leave programs change frequently, and business tax nexus questions require input beyond payroll. Verify current requirements with each state's agencies and involve tax counsel before concluding that a remote arrangement is free of consequence.
